Reference no: EM132808204

Dog Company makes 6,000 units per year of a part 5C for use in one of its products. Data concerning the unit production costs of the part follow:

Direct Materials                               $36
Direct Labour                                  $9
Variable Manufacturing Overhead          $5
Fixed Manufacturing Overhead              $15
Total Manufacturing Cost per Unit               $65

An outside supplier has offered to sell Dog Company all of the part 5Cs that it requires for $70 per unit. If Dog Company decided to discontinue making the part 5Cs, 30% of the above fixed manufacturing overhead costs could be avoided.

Required:

Problem 1: Assume that Dog Company could use the facilities presently devoted to production of the part 5Cs to expand production of another product that would yield an additional contribution margin of $50,000 annually. Should Dog Company continue to make part 5C or purchase from the outside supplier?